Selected
Correspondence from 1943 to 1952
(correspondence
in chronological order, continued)
To
the editor of the New York Times (August 19, 1949)
The
composite credit of private competitive traders, based, as it is,
upon actual exchange of goods and services, forms the only substance
of money. The different national monetary units are merely various
dilutions of this substance. It is more correct to say that there is
money in each unit than it is to say that each unit is money.
It
is for this reason that Gresham's law projects in the words, "bad
money drives out good money," a misconception of money. Good and
bad are not proper terms to apply to money. Money is invested to a
greater or lesser degree in various monetary units, the distinction
being quantitative and not qualitative. That units with a lesser
money content are proffered by buyers rather than those of larger
content is but a natural manifestation of the bargaining instinct.
To
M. S. Lurio (November 11, 1949)
Enclosed
is a draft of the proposed constitution of the board of valun banks.
The purpose is to make it as simple as possible and, except for the
projection of a principle, to leave the board free to exercise
judgment on the questions that will arise.
In
the prospectus of the New York Valun Bank, you will observe that the
word money does not appear. The process of the bank is described as
"trading by transferable credits," which is really a
definition of money. I am continuously at cross purposes between the
impulse to make a truthful statement and to yield to expediency as a
defense against the reactions that spring from the universal
ignorance and superstition of money. In the present promotional
effort, I have used the terminology current in business, and yet I
inwardly rebel in calling the overdraft bookkeeping entry on the
books of the bank, "credit."
This
is really not credit in the accepted sense, as it delivers nothing of
intrinsic value. It is merely authorization to the member in a debit
position to tender a check or checks to some suppliers-who are the
actual extenders of credit if they accept the tender. And they do not
extend credit to the remitter, but look to some other members to make
good. A valun check, like a dollar check, is merely a draft on the
market where the real creditors and debtors function, while the bank
is merely the bookkeeper.
Now,
should we call the bookkeeping entry which authorizes the remitter
through the process of red ink figures to tender checks to the
market, "credit?" Or should we adopt a more honest name,
such as "overdraft power" or "initiating power” or
"unearned drawing power," as distinguished from earned
drawing power, which is based upon an entry resulting from the
deposit of a check which is evidence of having delivered value to the
market? Or should we, for expediency's-sake, leave undisturbed the
psychology established by banking practice and let account holders
and the public think that the bank actually extends credit?
To
David Diamond (January 31, 1950)
One
of the collateral purposes of the valun plan is to diminish and
ultimately abolish the use of currency in payrolls, and thus diminish
the use of currency in general. Currency is indispensable, but its
present uses are excessive. This is due to its general use in
payrolls, and to the unattractiveness to employees of the present
checking method.
Under
our plan, each employee will be entitled to a check account with an
overdraft power with which he immediately can draw checks, thus
making it possible for the employer to make up payroll once a month.
To accomplish this, the employer will be supplied with a payroll
check about the size of a letterhead, on which he will list the
employees and the various sums to be credited to their accounts. This
will be mailed to the bank, where the various sums will be entered as
deposits to the accounts of the various employees. No checks will be
issued to the employees, and thus will be obviated the necessity of
their making individual deposits. This will dispense with a great
amount of detail.
To
A. L. Giberson (May 16, 1950)
I
have made several approaches to cooperatives, as it seemed to me and
others that they were constituted ideally for the valun project for
two reasons, to wit: they are drawn together by a common principle
and interest and are organized mostly along lines of human
necessities, and, second, their employees are more disposed to
cooperate than the employees of non coops.
Before
the valun or any other plan can gain wide usage, it must enter
payrolls, yet this is impossible until the system has broad
representation among dealers in consumers goods to bid for the
employee's interest.
The
dean of the Cooperative movement in America, Dr. James Peter
Warbasse, has endorsed the valun plan and mentioned it in his latest
book, The Cooperative Way, page 113.
I
am enclosing copy of a circular letter now going to a selected list
of manufacturers and wholesalers. If this brings response evincing
interest, I shall ask them to sponsor the plan to their retail trade,
as I find that the retailer asks whether he can pass valuns on to the
wholesaler.
To
Percival C. Brundage (October 14, 1950)
As
long as accountants fail to understand that the monetary concept is
the basic concept in accountancy, they will be frustrated in their
efforts to bring business facts into proper focus. It is as absurd
for them to undertake to present true mathematical analyses of
business performance, with the politician continuously changing the
power of the unit, as for an artist to paint true pictures with
colors mixed by another.
To
Holgar J. Johnson (November 9, 1950)
As
a constant reader of your excellently edited Money Matters, I see in
it reflection of the deep concern that is held by the insurance
companies over the progressing inflation. I wonder, however, how much
they hope to sweep back the tide with a broom of words. Is there not
some quest for action to be taken by the companies themselves to
preserve the tremendous equities involved in life insurance?
I
wish to go on record as forecasting the complete collapse of the
political monetary system in total inflation with no possible point
of stabilization. When the insurance companies are prepared to
entertain this possibility, I shall be prepared to present my plan
for stabilizing their income and outgo on a monetary unit dissociated
from the dollar and proof against inflation
To
Ivan Firth (February 12, 1951)
Inflation
is not a condition of imbalance between goods supply and money
supply, for such imbalance cannot occur. Money cannot be issued
without an exchange of goods and services, since it is not an entity
apart from exchange but springs out of exchange, nor can it be issued
unilaterally, since every issue of money requires the tender of it by
a buyer and a tender of value by a seller. Hence the two sides are
always synchronized and always in balance. Thus, if there were no
spurious monetary units injected, the price level would remain
constant, though, of course, individual commodities would rise and,
reciprocally, others would fall, thus balancing the rises with the
falls.
To
Ivan Firth (February 14, 1951)
Trade
is a process of finding affinities, and it is, of course, more
difficult to find direct affinities than by vicarious process. If one
of two traders can give the other an instrument that will ferret out
his affinity, it follows that trading may be consummated to a much
greater extent than if dependence is had upon the mere chance that
two traders can satisfy each other's wants.
This
transforms trade from a bilateral to a multilateral operation. To
accomplish this transformation is the sole and all important function
of money - the ferret of affinities.
To
Garet Garrett (May 7, 1951)
Our
libertarian writers paint a drab picture of the decline of private
enterprise and the rise of political enterprise. The political means
of attainment is seductively turning the minds of the people from the
economic means.
Education
is futile to overcome this trend. The cause of the trend must be
displaced by a mechanism whereby the trend will be in a wholesome
direction.
The
Welfare State is one that robs Peter to pay Paul, and its success
lies in the fact that Paul is fully aware and grateful for the
benefit received while Peter is bewildered over the identity of the
robber. He is apt to blame the tradesmen over whose counter he pays
his shrunken dollars, and thus private enterprise is doubly punished.
The
whole deception operates through a perversion of the monetary system.
Many of us suspect this, but our remedy is the usual stereotype -
education and a return to sound money. But to attain sound money we
must advance, not return, because we never had sound money.
What
we had in the "good old days" was unsound money only partly
developed. The power to degrade the monetary system and thus sabotage
private enterprise existed before Roosevelt, but he was the first to
release it beyond the power to arrest. The egg has been hatched, and
the chicken grows rapidly. "Sound money" advocates propose
to put the chicken back into the egg.
The
power of government to make paternalism seem practical, and thus
insidiously to socialize the economy, lies entirely in the fallacious
belief that government can and does issue money. An understanding of
the essence of money shows that no government ever has issued or ever
can issue genuine money. Their professed monetary issues have
precisely the same effect upon the money supply as a farmer produces
by taking the milk pail to the pump-not a larger supply of money or
milk, but a mere dilution.
We
bewail the ignorance of the people on economic and political matters,
but the real cause for dejection is that our businessmen do not know
the difference between real money and counterfeit. Because they and
the would-be educators of the people accept the fallacy of political
money power, they are unconscious socialists. This unconscious
socialism is universal; so the task of restraining the onward march
of the Welfare State is more gigantic than we have realized, if
undertaken through popular education.
However,
we need not educate the people on money or economics. We need not
tear down the present political monetary system. No governmental or
political action is called for. If we realize that only private
enterprise can organize and conduct a true monetary system, one that
will be stable and sound and inflation-proof, we need but to set it
up, and the people will not be slow to secede from the false and join
the true.
To
Edward Boykin (May 22, 1951)
A
friend has shown me your excellent article in the New York Times of
May 13; on the 1874 Green back Bill.
In
those days, the means of inflating the circulation was by printing
currency. The modern way is to print bonds, sell them to commercial
banks, then print checks to draw against the bank balance and let the
currency expand according to public demand. This is the smarter way
of using the printing press. It fools the people.
You
will recall that the Act of May 12, 1933, gave Roosevelt the
authority to direct the Treasurer to issue greenbacks up to $3
billions, which authority he did not use. He used the roundabout
method and increased the circulation by many times this amount with
not a single banker crying out, "printing press money. "
You see, the greenback way pays no interest, while the
bond-check-currency printing-press method does, and that stops the
mouths of the wise and deceives the public.
The
practice by government of inflating the circulation is now in its
third and last phase. The first was by debasing coins, the second was
printing currency, and now it is by the method above described. This
is the end of the trail; all governments are now perpetrating this
ultimate fraud, and I see no escape from total inflation, not only
national but worldwide.
To
Ivan and Gladys Firth (June 15, 1951)
A
friend asked me to review this old book, and since it covers a period
before your time, I thought you might be interested in reading this
first draft.
Review
of W. H. Harvey's Coin's Financial School
The
tattered and faded book from which these photostats were made awakens
nostalgic memories of the last decade of the nineteenth century, when
depression-inspired pursuit of the solution of the money problem made
passionate partisans of all men. Those were the days when one could
get at least emotional exhilaration out of an otherwise dry-as-dust
subject.
The
"free silver" crusade of the late eighteen-nineties marked
an epoch in American history. It was the all-time high for popular
interest in the money problem, approached in fervor only by the
Andrew Jackson campaign against the Second United States Bank. It
divided the nation not only politically, but also geographically. Had
the depression continued until the end of the decade, there might
have been a schism between the West and South against the East, for
the latter was considered by the former as "the enemy's
country.”
Josh
Billings said, "The less people know, the more they suspect."
The people, knowing little about the cause of the misbehavior of
money, instinctively became suspicious. The demonetization of silver,
called "the crime of 1873," served the need for the
emotional surge. Added fuel was supplied by the suspicion that
England had inspired the "crime."
The
"gold bug" partisans for the gold standard against
bimetallism were equally off the beam of reason, and answered their
opponents with invective and diatribe. A veritable groundswell lifted
all men into the air. While the free silverites were no more rational
than the gold bugs, the writings of "Coin" Harvey gave a
scholastic background to the former, for they were written in
pedantic style and were widely read.
The
torrent of hot words reached its climax in the presidential campaign
of 1896 with William McKinley, the Republican candidate, opposed by
William Jennings Bryan, "the boy orator of the Platte," who
stampeded the Democratic convention with his impassioned speech
concluded with the peroration, "thou shalt not press down upon
the brow of labor this crown of thorns nor crucify mankind on a cross
of gold." Though the campaign was a contest of passions, the
race was not decided by the amount of heat generated, but by cold and
brutal strategy conceived by Mark Hanna, the McKinley manager who
enlisted the banks to pressure manufacturers to post ultimata on
their plants. In cases where the plants were closed, a promise was
made that they would open immediately after election if McKinley were
elected. On the open plants, the poster carried the threat that they
would close if McKinley were not elected.
But
for this thrust at the breadbasket, the silverites might well have
carried the election. For the force of their crusade much if not the
major credit, must be given to "Coin" Harvey. His technique
merits examination.
Harvey’s
style of writing was popular mainly because he personalized the
subject by boldly using the names of prominent Chicago businessmen
and bankers and publishers as stooges to appear at his "school"
to ask the questions he wished to be asked, and brought off each
fictitious encounter with a personal triumph of his little hero,
Coin. The tactic second in importance was his liberal use of
cartoons. He artfully professed throughout the book that he appealed
only to reason and abjured sentiment, but as one comes to the end of
the book one discovers that he used the method of Mark Antony at the
grave of Caesar, for he climaxed with the most incendiary words.
While
the conspiracy theme of the "crime of '73" is not referred
to in the book proper, there are appended two chapters of his A Tale
of Two Nations, wherein the fiction is given form with the arch
conspirator being the English "Baron Roth." The reader can
easily supply the second syllable. " A certain Senator,"
the American co-conspirator and mercenary, is easily identified as
John Sherman, author of the "infamous" Sherman Act that
demonetized silver. Such were the tools with which the little master,
Coin, biased the minds of his readers.
After
the presidential election had put out the fire, what resulted from
the great conflagration? The silverites had argued that the
demonetization of silver had cut half the base from under money,
thereby reducing circulation and bringing hard times. The gold bugs
had maintained that "sound money" could be had only with a
gold base. Silver was not remonetized, and the gold standard held
full sway until another and worse depression which overtook the
nation in 1930-1933, brought forth the theory that the trouble came
from trying to maintain any metallic base. In 1934 gold was
demonetized, and we are today without any "redemption money.”
So
it was all much ado about nothing. The partisans of one metal and the
partisans of two metals were not talking about money at all. They
were merely debating, in their torrid fashion, whether the Government
should peg the price of one metal or two. But the Turkish bath was
good for the nation, because it got some poisons out of the system.
So
intricate are the machinations of money and so complicated are the
causes of its misbehavior, that it baffles even calm reasoning, and
solution is hopeless when emotion confounds logic. The moral is that
there will never be a solution of the money problem through
groundswells and prairie fires.
To
john Chamberlain (April 10, 1952)
Your
booklet containing "The Faith of the Freeman " is written
with such sincerity in the cause of private enterprise, that I assume
you will welcome comments. I hang my hat on this quotation: "In
terms of current labels, the Freeman will be at once radical,
liberal, conservative and reactionary. It will be radical because it
will go to the roots of questions."
I
wonder if you will go to the root of the money question. In your
recitation of the proper functions of government, you do not mention
money control. No doubt you take that for granted, as your readers
probably do also. I do not imply that you approve of the monetary
policies of the present and past administrations. But you probably
have not posed the question whether the state can, under any
conditions, provide a monetary system that is not adverse to a free
economy. Yet so long as you do not tackle this fundamental question,
your other soundings will be immaterial.
You
denounce, and rightly, such interventions as "tariffs, quotas,
exchange control, bilateral treaties, import and export prohibitions
or restrictions, government price supports, subsidies, or loans to
favored industries," etc. This constitutes your credo as a
professed friend of private enterprise. Like all other "friends,"
no darts are aimed at the political presumption of monetary control.
This precinct you hold sanctuary.
With
the monetary system socialized, the state can yield on all your
protests, and still the economy will be progressively socialized by
diluting the money supply with issues of spurious money. The state
can even abolish all formal tax levies, thus creating the appearance
of a taxless Utopia and giving society a free ride to its doom. You
are, in fact, spreading the opium unconsciously, as you state: "It
is imperative that those who already believe in a market economy,
limited government, and individual freedom should have the constant
encouragement of knowing that they do not stand alone, that there is
high hope for their cause."
Thus,
within the purview of your iconoclasm, leaving untouched the
superstition of the State's most stupefying icon, the more success
that attends your efforts, the more you contribute toward the
vulnerability of private enterprise, which you undertake to defend.
The
universal attitude of private enterprisers and economists is to
attribute the power and duty to the State of supplying the monetary
medium to the economy, reserving only the right to bellyache over the
consequences. This shows that at bottom, our whole society is tainted
with paternalism. The blame for the political perversion of the
monetary system must be placed upon society. For it has tried to
escape the task of rationalizing the subject and has thrust the
problem upon the Great White Father, who is just as ignorant as to
what constitutes money but is, of course, glad to grasp power.
The
monetary system must be alienated from the state and its control
assumed by private enterprise. To accomplish this, businessmen must
be roused from their private "initiative," and journalists
can serve the public interest by ringing the alarm, not by soothing
words.
To
Ludwig von Mises (April 10, 1952)
You
deplore the fact that the prevailing number of economic teachers and
writers are of the Leftist persuasion. From the viewpoint of the
Radical Right, there are no others. The so-called academic or
conservative or classical teachers and writers are merely different
categories of socialists, because they all accept the socialization
of the monetary system. Can you name any "capitalist minded "
authors, teachers, businessmen, bankers or taxicab drivers, here or
abroad, who do not accept the state control of the monetary system?
The
economy functions by means of verbal and written contracts, and under
a monetary system, these contracts are all expressed in terms of the
monetary unit. Hence the meaning of the monetary unit is the meaning
of the contract. With the state's power to change the meaning of the
monetary unit, it holds complete pervasive power over the economy. To
admit this all-pervasive intervention while objecting to collateral
ones, is to swallow a whale while gagging at minnows.
To
Bennett Chalis (September 12, 1952)
A
pipe through which water flows has capacity, but the power that moves
the water lies elsewhere. The same is true of money. The monetary
unit is merely the conduit through which purchasing power flows, such
purchasing power lying in the commodities or values exchanged.
Therefore the student of money must be careful not to fall into the
error of thinking that money has purchasing power. Things are
purchasable only with things. This unchanging law is just as
operative under a monetary economy as under a barter economy.
To
F. A. Harper (October 1, 1952)
I
have now read with pleasure, for the second time, your pamphlet,
"Inflation."
I
have looked for areas of agreement between your ideas and mine,
because I would be particularly pleased with such concurrence. Ever
since reading your The Crisis of the Free Market, published in 1945,
I have regarded you as an exceptionally clear thinker.
I
would say that we agree that: a) Governments can and do issue
counterfeit money, and that b) such issues act as insidious taxation.
We only partially agree as to the genuiness of any issue of "money"
by any government.
Your
designation as counterfeit (impliedly) applies to issues against
deficits only. This makes the criterion of genuiness one of balancing
the budget. As I see it, the professed issues of money by
governments, national, state and local, cannot be genuine, because
they are not the criteria of free exchange, i.e. a tax levy is not
determined by free exchange, which is the only area in which money
can be invoked.
I
raise this distinction to lay a more fundamental objection to
governments undertaking the issue function, although the distinction
is really academic. Governments have no need to issue "money"
where they have the courage to balance their budgets by frank
taxation. Are you not saying, for all practical purposes, therefore,
that all issues of professed money by governments are counterfeit?
It
is not clear whether you use the word money in the sense that I do. I
regard, as the primary monetary form, a draft against a drawing
account established by a credit administrator of the monetary system.
Thus the currency form would be but a conversion of a check, the
primary form.
I
read your pamphlet eagerly looking for some suggestion of a remedy
for legalized counterfeiting, and found this on page 23:
A
step in the right direction…….would be to compel the government
to live within its income. This means limiting government
expenditures, strictly and absolutely, to taxes that are openly
acknowledged to be taxes. This means prohibition of the concealed and
deceptive tax of inflation.”
Compel
and prohibition are words of coercion that apply to Government
measures over the citizen, but not in reverse. We cannot prevent the
Government from following political expediency, and it certainly is
expedient in practicing paternalism to hide the taxation under
deficits by means of counterfeit money issues. To do otherwise would
be to let the socialist cat out of the bag.
Even
if it were possible to force Government to a balanced budget policy,
it would not avert disaster, because of the more than $100 billion of
bonds in the hands of private parties, which, of course, have not yet
been monetized. When the demand for cashing comes, as come it must,
the Government will have no place to go to get the necessary cash to
"redeem " these bonds but to the banks, and this flood of
counterfeit dollars will wreck not only the dollar but the Government
itself. Business must build its own monetary system to save both
itself and government from utter chaos.
May
I discuss with you the point you raised at the conference relative to
the "insurance" provision in the valun plan? Perhaps you
think its purpose is similar to the Federal Deposit Insurance
Corporation, but it is not.
My
visualization of the problem is this: Each bank in the monetary
system is the mechanism of a community of money issuers, all using
the same name, dollar or valun, etc. These issues pass into the
common stream of money. Yet the varying credit policies of the
various banks with their varying loss ratios suggests that there be
introduced some compensatory factor to make them par. Or should we
ignore these discrepancies, as has been done in all monetary systems
to date? The tendency of defaults of money issuers is to unbalance
the money supply with the values supply, producing slight inflation.
But there is an offset-ting factor in the loss - which may be
considerable - of our currency through various natural causes. What
do you think?
To
Paul L. Poirot (June 21, 1952)
Frank
Chodorov's piece entitled "Shackles of Gold" turns out to
be a confession rather than an accusation as the title had led me to
expect. It is the old-time religion, humbly expressed and pleasantly
intoned for the ears of the faithful of the Gold Standard League.
Chodorov
has discovered that "money was invented by traders long before
any government thought of monopolizing it." What escapes him is
that traders have continued to issue all of the money in circulation
and will ever be the sole issuers of money. He does not realize that
no government ever has or ever can monopolize money issuance, because
the so-called money issue of government cannot circulate of itself.
It can only flow by blending with the real money issued by traders.
The farmer cannot produce a salable commodity from the water pump
alone; he must first get the milk from the cow and then inject the
water into it to make diluted milk.
The
nonsense about gold convertibility as a converter of counterfeit
money into genuine: Does regulating gamblers make them any the less
gamblers? This is not a perfect analogy, since in the case of
counterfeit money the regulator and the regulated are the same.
Nonetheless, the gold bugs do not seem to realize that we have
gold/dollar convertibility on a sufficient scale to prove that it is
no deterrent to the issuance of counterfeit. As you know, foreigners
may convert dollars into gold, and yet gold piles up in Fort Knox.
Also, there is no diminishment in the domestic gold miners'
conversion of gold into dollars.
During
the Civil War, the Government suspended convertibility. After serious
debate for years, it restored convertibility on January 2, 1879,
under tense fears of a run on gold. But the conversion worked in
reverse; more gold flowed into the Treasury than flowed out.
When
Roosevelt ordered the people to turn in their gold at $35 an ounce,
they responded with alacrity.
The
people, today, can get the substance silver not only in exchange for
silver certificates, but for any bills. Yet there is no demand for
conversion.
It
is disconcerting that businessmen, realizing that there is something
wrong with the monetary system, try only to get the counterfeiter to
purify itself, instead of taking in their own hands the exclusive
power and responsibility for the medium of exchange. It shows that
they are at bottom paternalistic, willing only to whine against the
socialistic trend which the political monetary system makes
inevitable.
Random
(Undated)
Are
you not willing to give your IOU when you want to buy something,
provided that that IOU is payable only in your services or goods? Of
course you are. Everybody is. It merely means creating sales for
yourself. We are all willing to issue our IOU's. Now all we have to
agree upon is that we will all accept one another's IOU's. Thus we
really redeem our own IOU's by accepting anybody's IOU's. Since,
therefore, it makes no difference where the IOU originated,
individual signatures need not appear thereon, and we can adopt
standard pieces of printed paper and coins….
From
Paul L. Poirot (September 11, 1952)
It
is not clear to me why the details of a valun banking system are
included at all in your presentation. Does that not presume an
impossible insight into the results of freedom?
Let
us say, for example, that I am in theoretical opposition to our
public highway system; I would prefer privately owned and controlled
roads. Must I presume to know how or where or why or when individuals
would voluntarily develop a system of highways? Or shall I leave that
development to the voluntary efforts of individuals, some of whom are
more facile than others? The question, I suppose, is one of strategy:
How can I best persuade others to give private roads a trial?
Private
money must be a credit instrument, a promissory note, for which some
individual assumes responsibility. I can issue a promissory note
without a bank's signature. I cannot circulate it as money except
among those who have faith in my productive capacity, in my ability
to deliver the promised goods or services. Within the trading circle
of my immediate family, we use such a system, based upon unwritten
"scrip" and unworded "promises." Credit is sought
and received and honored strictly on the basis of personal
acquaintance. Is there any other way of promoting the use of private
money within a larger social circle than the family, except on that
basis of faith in the individual? A man's money cannot possibly be
any better than his word - his honest effort to redeem his promises.
I
can see how voluntary credit insurance might be a profitable business
adjunct of a private monetary system. I might well elect to patronize
a bank which specialized in character reading and insuring the credit
of individuals, just as I now buy term insurance to cover my
outstanding debts. Certainly, I would prefer to "shop around"
among competing bankers for that particular service, just as I now
shop for life insurance or any other commodity or service. I would
abhor a universally acceptable valun if I thought it depended upon,
or might somehow lead to the development of, a single central bank or
credit clearing house. I am trying to say that I do not care to know
in advance precisely how the valun banking system might develop under
private enterprise. But I am sure we could depend upon private
competitive enterprise to coordinate and blend into a workable
arrangement a series of individually developed and originally highly
variable valuns.
I
should not attempt to offer an exhaustive list of the means to be
followed toward the end of perfecting a private monetary system. For
to attempt such a thing would be in itself a denial of faith in
individuality and private enterprise. Let the best man work out the
best means.
To
Paul L. Poirot (September 15, 1952)
If
we assume that the money issuer's commitment is a promise, we, of
course, involve a moral question. But the money issuing act does not
involve a promise, and hence there is no moral element involved.
Therefore, there is no need of having the act of money creation
underwritten by credit insurance. The reciprocating action of the
private enterprise money issuer, i.e. his compulsion to bid for money
with his goods or services, as against his bidding for goods or
services with money, makes the involvement of a promise entirely
gratuitous, and, in fact, irrelevant, since there is no
identification of creditor and debtor in the act of creating money.
The promissory note that is customarily required by bankers from the
"borrower" involves no loan of money. It is but the initial
step in the creation of new money, which is not actually created
until the "borrowers' " draft upon the "loan" is
accepted in the market in exchange for values. Even then, there is no
credit since the acceptor of the draft does not know whether it is
drawn against black ink or red ink.
There
is, in the commercial sense of the word, no credit involved in money
creation. Commercial credit involves a specific creditor and a
specific debtor, and arises out of the transfer by the creditor to
the debtor of goods or services or already existing money. Though it
is not recognized by the users of money, there is implicit in the
monetary system a faith that none will be admitted to the issue power
other than private enterprisers, who, for the reason stated above,
keep the redemption power in constant balance with the issue power.
In
the valun plan there is free competition among the banks in the
system. Some may operate under a broad credit policy, others under a
narrow one. Some may operate by the present practice of requiring
"borrowers" notes, some by merely allowing overdrafts. Some
may charge interest while others may depend upon service charges, or
both. Voluntary associations of workers or other groups might
organize a bank. Does this not give the flexibility and freedom of
competition that you seek?
The
plan not only provides for competition within the system but also
recognizes that the system as a whole must be exposed to competition
and that it cannot grow into a universal system unless it responds to
men's impulses for freedom of action. Other than the exclusive use of
the name valun, there is nothing monopolistic about the plan. All its
procedures are subject to the crucible of competition; it cannot
begin as a universal system but must earn that status.
From
Paul L. Poirot (September 16, 1952)
The
step of running the valuns through a theoretical bank seems
unnecessary to me; All the bank does is to endorse a personal note,
giving it negotiability. The original signer is still responsible, as
a debtor, to redeem his promise, no matter who finally appears as his
creditor. Any responsible person could serve the banking function of
insuring the creditor against the debtor's default. That is strictly
a business service. Let any enterpriser do it. Call him a banker if
you please, but all he really does is endorse a promissory note. I
can't see how you get to the point of view that valun holdings do not
reflect the extension of credit to the original signer of a
promissory note. Either the banker or the ultimate creditor - the
person who finally claims redemption - extends the credit. But credit
it is, or so it seems to me, involving persons who trust one another.
To
Paul L. Poirot (September 19, 1952)
Commercial
credit is a relationship of a specific creditor and specific debtor,
arising out of the transference of some value. It rests on faith in
the moral responsibility and competence of the debtor, whose default
inflicts loss on the creditor.
Banking
credit, on the other hand, or money-creating credit, is social -
without specific creditor or debtor. It is the money-creating
process. It arises from an implicit compact among a group of traders
to honor the requisitions of one another that conform to the rules of
the monetary system as administered by a central bookkeeper and
credit administrator, commonly called a bank. Its operation is as
follows:
1.
The bank establishes a drawing account for the prospective money
issuer by entering a sum on its ledger. This is called a loan, but
involves no transfer of money or value by the bank. It involves no
deduction from the resources of either the bank or its depositors. In
fact, it manifests itself as an increase in total deposits.
2.
The "borrower" draws a draft upon his drawing account and
tenders it to a trader who delivers value therefor. This exchange
constitutes the issuance of money by the "borrower"- buyer
and backing of the money by the seller, who becomes a creditor, not
of the money issuer but of all the traders in the monetary system.
The money issuer becomes debtor to the monetary system.
3.
The money circulates, and thus creditor is replaced by creditor until
it finds a customer for the issuer, who then returns value in
exchange for the value received in the initial exchange. The money is
thus retired.
Throughout
the whole process, there has been no credit in the commercial sense
of the word. The banker gave no money or other value. The "borrower,"
with the acceptance of his draft by the seller, created the money. If
the "loan " should be defaulted, the banker would lose
nothing, because he would merely distribute the deficit over the
accounts of all his depositors through his charges for service. Nor
would this constitute a loss to them because, but for the monetary
system, trading would have to be by barter, and that would be a real
loss.
All
parties to a monetary system are either creditors (those who have
surpluses) or debtors (those who have bought more than they have
sold) of the whole system, but no individual is creditor or debtor to
any other individual. There is no moral factor involved in money
issuance, because the issuer acts as a redeemer of money by merely
following his acquisitive instincts. He is eager to exchange his
goods or services for money, for it is by this process that he gains
his profit. To do otherwise would be to boycott himself. He may fail
to "make" money and thus fail to act as a money redeemer,
but, if so, it is contrary to his intentions.
But
does the moral factor enter at no point in a monetary system? It
enters very profoundly if the actors know what they are doing. Alas,
all participants in the monetary system, as well as the politicians
who make the rules, are innocent of infidelity to the basic faith
upon which the system rests. This faith is the unwritten and
unconscious pact that exists between the banker and the whole group
of trader participants. It resides in the observance of the rule that
none but private competitive enterprisers be admitted to the money
issuing power. This observed, the monetary system automatically
functions for good only. Ignored or contempted, it just as
automatically miscarries.
From
Paul L. Poirot (October 2, 1952)
I’m
still confused as to the difference between commercial credit and
bank credit. You seem to be saying that it is possible somehow for
everyone to trust everybody without your first trusting me, and vice
versa. I would concede that a banker might be a highly useful
promoter of this ideal of mutual trust, but doesn't his value in this
respect depend entirely upon his personal assumption and fulfillment
of responsibilities? I can’t see that the mere presence of a banker
automatically relieves all debtors of their responsibilities and all
creditors of their fears of loss. If obligations are outstanding, it
strikes me that they must be assessed against some individual.
To
Paul Poirot (October 9, 1952)
Your
effort to understand the social nature of money credit as contrasted
with bilateral credit may be cleared up if you will ask yourself this
question: What becomes of the "losses" or "charge-offs"
in the banking business? Are they borne by the bank or included in
the costs of doing business and therefore borne by the bank's
customers?
To
be sure, if these items become excessive, the bank may be unable to
pass them on to its customers, since its charges for services might
not meet competition. There is an optimum point at which the
charge-off percentage is neither too large, reflecting laxity, nor
too small, reflecting ultra conservatism. This point can be arrived
at only by free competition among banks, a condition that has not
existed under the politically controlled monetary system with its
many provisions of capital and surplus requirements and, above all,
by reason of the limitation of currency supply.
Banks,
incidentally, do not fail because of insolvency, but rather because
of their inability to meet sudden and enlarged demands for currency.
This limitation is purely gratuitous, as there is no sound reason for
the distinction between check money and currency money.
From
Paul L. Poirot (October 10, 1952)
The
multilateral credit media to which you refer means to me that many
persons have collaborated in its creation. In other words, a lot of
people may agree that it's all right for me to trade with valuns, if
I choose. But it seems to me that the multilateral arrangement ends
there. I can't understand how private money or credit can be anything
other than bilateral. One responsible person grants credit which
another responsible person has requested. If this credit instrument
is then negotiable, that doesn't make it multilateral; it just
substitutes one debtor or one creditor for another, still leaving
only two persons directly involved. The original credit instrument
may go through hundreds of hands in that fashion, promoting one trade
after another, but never are more than two persons directly involved
at any given stage o f this process.
To
Paul L. Poirot (October 18, 1952)
You
are quite right in your statement that "The multilateral credit
media…means…that many persons have collaborated in its
creation…but never are more than two persons directly involved at
any given stage of the process."
In
other words, monetary media move by the displacement of creditor
after creditor until they are retired by the issuer/debtor, there
being at all times one creditor and one debtor. But the creditor's
claim and the issuer-debtor's are vis-à-vis the market and not
between two individuals, both of whose identities are merged in the
compound which is called social credit. Failure of the issuer-debtor
to retire an equal number of monetary units, by his sale of goods or
services, imposes a cost on the whole body of exchange participants.
These costs are distributed to all the exchange participants through
the charges rendered for banking services.
These
costs, however, are not losses to anyone, because they are the price
for escaping the much greater cost of doing business by the
whole-barter method. The method of finding the optimum of such costs
is competition among banks, since they are reflected in the charges
that banks must make for their services to their customers.
This
virtuous social credit process is inherent in any monetary system; it
is, in fact, the criterion thereof. Unseen and unsung, it has gone on
raising man’s living standards and will continue to do so unless it
be overcome by the antisocial counterfeiting practices of
governments, than which there could be no greater calamity.
END
OF SELECTED CORRESPONDENCE; END OF DOCUMENT
